WEBVTT - P&L: Does The Fed Still Matter to Equity Traders?

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<v Speaker 1>Welcome to the Bloomberg pim L Podcast. I'm Pim Fox.

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<v Speaker 1>Along with my co host Lisa Abramowitz. Each day we

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<v Speaker 1>bring you the most important, noteworthy, and useful interviews for

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<v Speaker 1>you and your money, whether at the grocery store or

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<v Speaker 1>the trading floor. Find the Bloomberg pm L podcast on iTunes,

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<v Speaker 1>SoundCloud and at Bloomberg dot com. I'm Lisa Bramo. WIT's

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<v Speaker 1>my co host, Pim Fox is on vacation. We let

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<v Speaker 1>him out of the building, but he will be back

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<v Speaker 1>in about a week and a half. I want to

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<v Speaker 1>learn more about whether the FED even matters if you're

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<v Speaker 1>an equity trader anymore, given that inflation expectations have gone

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<v Speaker 1>up so much that it almost makes the benchmark great

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<v Speaker 1>less relevant, possibly irrelevant. I want to bring in Matt Malley,

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<v Speaker 1>equity strategist at Miller t Back, to give an answer

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<v Speaker 1>to that. Matt, what do you think we always so

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<v Speaker 1>the one thing that we do have to worry about?

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<v Speaker 1>What that is? And I certainly understand why, uh why

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<v Speaker 1>people are starting to feel that way, and and and

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<v Speaker 1>I think we would all agree that would be a

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<v Speaker 1>good thing because they've been so dependent on the set

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<v Speaker 1>for so long. But the one thing I do worry

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<v Speaker 1>about is we move into next year. Uh. Anything can

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<v Speaker 1>happen in the next six weeks or so, but UH

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<v Speaker 1>is that as rates move up, we still have huge

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<v Speaker 1>amounts of leverage in the marketplace. Now the banking system

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<v Speaker 1>is certainly the U S banking system anyway, is much

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<v Speaker 1>less leverage than it was during the during the crisis.

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<v Speaker 1>But the New York Stock Exchange margin dead is above

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<v Speaker 1>it's two sounds of seven seven levels. So there's still

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<v Speaker 1>a lot of leverage out there. And as interest rates

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<v Speaker 1>move higher, the cost of carrying that leverage, UH will

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<v Speaker 1>go up, and which means some people will have to

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<v Speaker 1>unwind some of that leverage. So for one second, I

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<v Speaker 1>really want to dig into where the leverage could be

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<v Speaker 1>because a lot of people have talked, as you mentioned, Matt,

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<v Speaker 1>the banks themselves have de levered. But this is an

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<v Speaker 1>important point. I mean, where is the leverage? Where are

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<v Speaker 1>we going to see the pain? Well, you see, like

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<v Speaker 1>I said that the New York stock has changed, and

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<v Speaker 1>just in the stock market than the amount of margin

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<v Speaker 1>debt UH with people are just levering up on the

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<v Speaker 1>markets is is at all time higher. It's actually I

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<v Speaker 1>think it's just slightly below that, but it's uh well

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<v Speaker 1>above where it wasn't two thousand and seven. We've also

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<v Speaker 1>seen um, you know, with the you know, so much debt,

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<v Speaker 1>with some of these companies putting on things, so much

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<v Speaker 1>debt has been put into non uh things that didn't

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<v Speaker 1>really help service that debt. In other words, they've gone

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<v Speaker 1>back to buying back stock and such and rather than

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<v Speaker 1>investing in their in their own businesses. So uh, in

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<v Speaker 1>a in a weird way, uh, the companies that are

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<v Speaker 1>more leverage than they used to be. And of course

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<v Speaker 1>we have a private private debt as a percentage of

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<v Speaker 1>GDP up at historic Hive. So there's a lot of

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<v Speaker 1>leverage out there in the marketplace, even though it's not

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<v Speaker 1>necessarily in the banking system. And therefore I'm not worried

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<v Speaker 1>about the system collapsing, but they still could have a

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<v Speaker 1>cause the headwinds for for for the for the stock markets,

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<v Speaker 1>because leverage help the addition of leverage help the stock

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<v Speaker 1>market move higher in the last six seven years. I'm

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<v Speaker 1>not certainly not saying that's the only reason one up,

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<v Speaker 1>but it's certainly helped it. So we'll cause the headwind

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<v Speaker 1>if if that leverage needs to be unwound. So what

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<v Speaker 1>would have to happen for the leverage to be unwound?

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<v Speaker 1>I mean, is this people borrowing short term in order

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<v Speaker 1>to finance longer term purchases are riskier purchases, So if

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<v Speaker 1>the short term rate to borrow goes up substantially, people

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<v Speaker 1>will need to de lever. Is that the idea here,

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<v Speaker 1>so that that as benchmark rates climb higher, you will

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<v Speaker 1>see sort of some of this leverage squeezed out, Yes, exactly.

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<v Speaker 1>And then I mean, although I will say this, it's funny,

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<v Speaker 1>you know the people are talking about among one of

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<v Speaker 1>the things I've been saying for a while is that

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<v Speaker 1>the FED realizes this, and that's one of the reasons

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<v Speaker 1>why they said, even before they did their first rate

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<v Speaker 1>hike that they would go very slow. And part of

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<v Speaker 1>that has to do with the what with the speed

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<v Speaker 1>of the economy, but it also has to do with

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<v Speaker 1>this issue. They don't want to suddenly cause more problems

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<v Speaker 1>than they're solving. So I don't you know, everybody's starting

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<v Speaker 1>to say, now with Trump coming in the office, suddenly

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<v Speaker 1>they're gonna have to raise rates a lot faster than

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<v Speaker 1>they than they would otherwise have UH, that's probably true,

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<v Speaker 1>but I don't think it will be quite as fast

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<v Speaker 1>as people as some of the most various people are

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<v Speaker 1>calling for. UH. And so again it's causing a headwind,

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<v Speaker 1>not a major a major problem, but it's definitely something

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<v Speaker 1>that will have an impact on stock prices away from

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<v Speaker 1>the fundamentals, and with with the settle reserve having been

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<v Speaker 1>so important to the markets in the last few years, UH,

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<v Speaker 1>some of these non fundamental factors have been important and

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<v Speaker 1>they will be for I'm sorry for to say for

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<v Speaker 1>some time to come. Which areas of the stock market

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<v Speaker 1>do you think are most vulnerable to a dramatic pullback

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<v Speaker 1>as leverage gets squeezed out? Well, and it's really gonna

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<v Speaker 1>be across the board on a very near term basis,

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<v Speaker 1>though is oddly enough, is that I worry about the

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<v Speaker 1>financial stocks only, and this is between. This is really

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<v Speaker 1>on a short term basis, been between maybe now on

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<v Speaker 1>the end of the year. They are certainly poised to

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<v Speaker 1>go higher because UH, interest rates are poisoned to go

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<v Speaker 1>higher and which should you know, invert the sorry, UH,

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<v Speaker 1>keep the EO courage steeper, continue to steep, and then

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<v Speaker 1>that should be helpful However, they've gone so far, so fast,

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<v Speaker 1>and the problem is we have everybody's on one side

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<v Speaker 1>of the boat. You look at the sentiment indicators for

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<v Speaker 1>the mom market, there's over extend as I've ever seen them.

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<v Speaker 1>I've been doing this for over thirty years. Uh And,

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<v Speaker 1>and the positioning isn't quite as bad as it has been,

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<v Speaker 1>but it's still quite extreme, or getting more extreme, I

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<v Speaker 1>should say. And the same with the bank stocks. You

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<v Speaker 1>look at some of these charts, they're wildly overbought. Again.

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<v Speaker 1>I guess my point is these things will may look

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<v Speaker 1>like they're collapsing for a very short period of time.

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<v Speaker 1>But if you like these groups and uh and in

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<v Speaker 1>these sectors you want, you want to think hold off

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<v Speaker 1>and buy them. I think you get a better chance

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<v Speaker 1>to buy them at lower levels down the road as

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<v Speaker 1>we moved towards the end of the year, rather than

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<v Speaker 1>chasing them up at these levels. Matt malle thank you

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<v Speaker 1>so much for joining us. Matt Malley, equity strategist at

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<v Speaker 1>Miller T Back. Thanks for listening to the Bloomberg P

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<v Speaker 1>and L podcast. You can subscribe and listen to interviews

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<v Speaker 1>at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm

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<v Speaker 1>pim Fox. I'm out there on Twitter at pim Fox.

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<v Speaker 1>I'm out there on Twitter at Lisa Abramo. It's one

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<v Speaker 1>before the podcast. You can always catch us worldwide on

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<v Speaker 1>Bloomberg Radio